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Swedish Supreme Court finds hypothetical licence fee too hypothetical

When it comes to calculation of damages in copyright infringement cases, what is the correct approach to follow? Is the price of a 'hypothetical licence' a good criterion?

KatfriendHans Eriksson (Westerberg &
Partners) discusses a very recent decision of the Swedish Supreme Court, which has answered the latter question ... in the negative.

Here's what Hans writes:

“There have been several recent high-profile
criminal copyright infringement cases against
the operators of illegal filesharing services in Sweden, most notably against operators
of the Pirate Bay, a much-litigated service avid readers of this blog will
recognize from this
case (or perhaps your kids’ internet browsing history).

Defendants have been given stiff prison sentences (by Swedish standards),
rightsholders have been awarded significant compensation and ill-gotten gains
have been gotten-good by the state. All was well and Swedish IP practitioners
and rightholders rejoiced.

But in a recent
decision against the operators of illegal streaming site Dreamfilm, the
Swedish Supreme Court delivered some stern words about how compensation should
be calculated in these cases.

Not so fast with your $£€s the court says, let’s see your evidence first.

Under Section
54 of the Swedish Copyright
Act, anyone
who commits copyright infringement shall pay the rightholder ‘reasonable compensation’.
If in addition the infringement has been carried out intentionally or
negligently, compensation shall also be paid for ‘additional damage’ caused by
the infringement. Swedish litigants also find solace in the general provision
in Chapter 35 Section 5 of the Code of Judicial Procedure, if full proof of the extent of
damages cannot be invoked, the court may estimate the damage to a reasonable
amount (i.e. shoot wildly from the hip with a blunderbuss).

In Swedish case law and
literature, the application of hypothetical licences corresponding to the
infringing use has long been championed as the most efficient way to calculate reasonable
compensation. This is a good method to use in cases where the rights infringed were
available on the open market. Such hypothetical licences are simply not that
hypothetical. But the application of this principle to cases where there is no licensing
market or no licensing model that corresponds to the infringing use has proven
problematic. In cases against filesharing services, the use of such models has resulted
in notably different compensation levels for arguably similar infringements. One
Court of Appeals found EUR 70,000per movie a reasonable compensation against
the Pirate Bay, while another found EUR 200,000 per movie to be reasonable
compensation against Swefilmer.

In the present case, the
lower courts had taken the defendants on a wild ride. The District Court
sentenced them to prison terms in the range of 6-10 months and to pay damages of
about EUR 125,000. The Court of Appeals gave them conditional sentences instead
of prison but increased the damages to approximately EUR 400,000. Unhappy with
the legal uncertainty, the Supreme Court decided to shed some light on how reasonable
compensation should be calculated.

The price of consent

In this case the rightholder
had based its claim for reasonable compensation on a hypothetical licence that
was unlimited in time, number of views, geographical use, was free for the
viewer and had no copying safeguards – a virtually total exclusive licence to
the movie. A type of license rarely - if ever- seen on the market. The cost of such a licence
would have to cover all the production costs of the movie, with a 20 percent
profit add-on (because surely all movies
make a profit...). That amounted to approximately EUR 2 million, but the
rightholder magnanimously, and without explanation, limited its claim for
reasonable compensation to approximately EUR 800,000 (by itself quite a shot
with the blunderbuss, but I digress).

The Supreme Court found the
hypothetical licence too broad and not based on the use the defendants had made
of the movie, which was for example limited in time and only covered streaming.
Such a broad licence is perhaps what the rightholder would have demanded to
license the defendants’ service, but it is not reasonable to think that it would
have been accepted by the defendants. Interestingly, the court thus indicated
that if you want to use a hypothetical licence as a tool to calculate
reasonable compensation for infringement, you must take into account the infringers’
(illegal) business model. And EUR 400,000 per movie was simply not commercially
viable for the criminals.

This hypothetical licence
was thus too far removed from reality to serve as a tool for calculating
reasonable compensation in this case. Reasonable compensation must instead be
based on the totality of the evidence invoked by the rightholder. Loosely
based on a slew of disparate data points about how long the infringement had
been, the lack of evidence of numbers of streams, the rightholder’s own
commercialization of the movie and general licensing models for broadcasting
and rental of movies, the court found that approximately EUR 40,000 would
constitute reasonable compensation for the defendants’ use of the copyright in
the movie.

(With the smoke settling
from the Supreme Court’s own final shot of its mighty blunderbuss,) Swedish
copyright litigants have a new general feeling of what amounts to reasonable
compensation on a per movie basis in these cases. But exactly how the Supreme
Court arrived at this sum is anyone’s guess. In practice, it may not make much
difference. Since operators of illegal filesharing or streaming sites, once
they are caught, usually have infringed the rights to hundreds if not thousands
of movies, rightholders should just base their claim for reasonable
compensation before Swedish courts on approximately EUR 40,000per movie multiplied
with the number of movies needed to get as much money from the infringers as
can be expected to be found in their bank accounts.”

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